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Financial Ratios Part 3 of 21: Working Capital to Gross Revenues

What is the Capital available vs. the size of the farm or business?

Financial Ratios can assist in determining the health of a
business. There is a minimum of 21 different ratios that can be looked at by
many financial institutions. You cannot look at a single ratio and determine
the overall health of a business or farming operation. Multiple ratios must be
used along with other information to determine the total and overall health of
a farming operation and business. This series of articles will look at 21
commonly used ratios.

The Working Capital to Gross Revenue Ratio is a measure of
liquidity and is determined based on information derived from a business’ or
farm operations balance sheet. The term liquidity refers to the ability of a
business or farm operation to meet their financial obligations of debt
payments, taxes, and family living expenses. The Working Capital Ratio to Gross
Revenues specifically measures the amount of capital the business or farm has
with relation to the farm or business’ size.

To determine the Working Capital to Gross Revenues ratio you
divide the Working Capital by the Gross Farm Income.

Working Capital to
Gross Revenues =

Working Capital

Gross Farm Income

This ratio is measured as a percentage. The higher the percentage
the more cash you have available to meet the short-term needs of the business
or farm without the use of additional financing. Having a ratio above 25% puts
a farm or business on strong footing. Anything less than that makes the farm or
business at risk of needing financing to make it through the year due to market
instability.

If you have any further question please feel free to contact
your local Farm Management Educator or .(JavaScript must be enabled to view this email address).

Information for this article has been modified and gathered
using material created by the